Key Takeaways
- When you apply for an SBA 7(a) loan, the debt you already hold factors into how much capital you qualify for.
- You need to be able to prove that your revenue is sufficient enough to cover your current debt and the additional debt you’re applying for.
- Lenders also take into account the type of debt you have, looking at interest rates and repayment terms to assess how your cash flow is affected.
Can You Qualify for an SBA 7(a) Loan With Existing Debt?
At its most basic level, qualifying for an SBA 7(a) loan is about proving to lenders that you can pay it back. Lenders and loan officers make this assessment by reviewing a variety of your financial statements; however, your existing debt and how it affects your cash flow is a significant factor in your qualification.
Even if your revenue is high and your credit is good, if your cash flow is being significantly hampered by existing debt, your ability to take on more debt could be limited.
Even if your revenue is high and your credit is good, if your cash flow is being significantly hampered by existing debt, your ability to take on more debt could be limited.
What Amount of Debt is "Too Much"
Debt caps on SBA 7(a) loans can differ between lenders and facilitators.
At NEWITY, here is a calculation you can perform in order to assess your own debt-to-income ratio:
This is not a guarantee that you will qualify for this loan size, as there are other metrics that determine your qualification, however, this is a good general metric to ensure that you are not applying for more debt than you’re financially equipped to handle.
At NEWITY, here is a calculation you can perform in order to assess your own debt-to-income ratio:
- Find your average annual revenue for the last 3 years
- Find 35%-50% of that number
- Subtract all existing business debt
This is not a guarantee that you will qualify for this loan size, as there are other metrics that determine your qualification, however, this is a good general metric to ensure that you are not applying for more debt than you’re financially equipped to handle.
Types of Debt
Lenders not only look at a borrowers’ existing debt balance, but also what type of debt vehicles are included within that total amount. Depending on the type of debt and its terms, different debt is factored into the borrower’s application accordingly.
Example: EIDL’s have a 30-year term and 3.75% interest rate, so those balances are treated differently than a non-SBA loan with a shorter term and higher interest rate.
These two types of debt impact a business’s cash flow very differently within the context of an SBA 7(a) loan with a 10-year repayment term.
Assessing Your Cash Flow
If you’re still unsure as to when is the right time to apply, or how much to apply for, consider performing a comprehensive cash flow assessment on your business.
Step 1: Calculate Monthly Net Cash Flow
Start by reviewing your monthly cash inflows and outflows:
Step 2: Determine Your Debt Service Coverage Ratio (DSCR)
This ratio shows whether your business generates enough income to cover loan payments.
Formula: DSCR = Net Operating Income / Total Debt Payments
Step 3: Forecast Future Cash Flow
Use historical data to project cash flow for the next 12 months. Include:
Step 4: Estimate Loan Amount Based on Cash Flow
Use your DSCR and forecast to back into a safe loan amount:
Step 5: Consider Use of Funds
Align the loan amount with your business goals:
Step 1: Calculate Monthly Net Cash Flow
Start by reviewing your monthly cash inflows and outflows:
- Inflows: Revenue from sales, receivables, investments, etc.
- Outflows: Operating expenses, payroll, rent, loan payments, taxes
Step 2: Determine Your Debt Service Coverage Ratio (DSCR)
This ratio shows whether your business generates enough income to cover loan payments.
Formula: DSCR = Net Operating Income / Total Debt Payments
- A DSCR of 1.15 or higher is a good target for loans up to $350,000
- If your DSCR is below 1.0, you’re not generating enough cash to cover debt
Step 3: Forecast Future Cash Flow
Use historical data to project cash flow for the next 12 months. Include:
- Seasonal trends
- Expected growth
- New expenses or investments
Step 4: Estimate Loan Amount Based on Cash Flow
Use your DSCR and forecast to back into a safe loan amount:
- Calculate how much monthly loan payment your business can afford.
- Use that amount to estimate the maximum loan size using amortization calculators or lender tools.
Step 5: Consider Use of Funds
Align the loan amount with your business goals:
- Working capital needs
- Material purchases
- Debt refinancing
Ultimately, how much capital you’re qualified to receive through an SBA 7(a) loan is dependent on several factors, many of which you cannot perfectly assess yourself.
At NEWITY, our team performs a “soft credit pull” when you submit an application, meaning the credit inquiry will not appear on your credit report, and your application submission will not affect your credit score.
If you’re interested in learning how much you could qualify for today, submit an application and find out in just 10 minutes!
At NEWITY, our team performs a “soft credit pull” when you submit an application, meaning the credit inquiry will not appear on your credit report, and your application submission will not affect your credit score.
If you’re interested in learning how much you could qualify for today, submit an application and find out in just 10 minutes!
Find out how much you could qualify for
